How to Prioritize Financial Goals

A new technique to help your clients make those difficult trade-offs in their investing plans

May 08, 2019

Samantha Lamas

For clients to make the most of goals-based financial planning,
they need to understand two things: their true investment goals and
how to prioritize them. This approach to financial planning can lead
to an increase in client wealth of more than 15%, but our research has found that
clients often have trouble recognizing and planning for these goals on
their own.

In a previous blog post, we talked about how advisors
can use a behavioral nudge to help clients achieve the first step,
which is identifying investment goals that encapsulate their
motivations and preferences. Once those are established, the question
becomes how to prioritize them.

Our research suggests a promising technique for how advisors can
help clients manage multigoal situations and uncover their
preferences. Advisors can decide how to best allocate resources to
keep clients motivated and connected to their goals.

The power of different ranking techniques to help prioritize
financial goals

Conventionally, advisors work to help clients prioritize financial
goals by asking them to rank their goals in order of importance. This
technique is easy to implement, but research shows it may not generate accurate,
consistent results.

To evaluate if an advanced technique could more effectively help
investors prioritize goals, we experimentally compared the
conventional approach with Maximum Difference Scaling. In this technique,
participants were presented with several subsets of items and asked to
rank only the most and least important. A formula was then used to
tease out their preferences based on their answers.

For this research, participants were randomly assigned to one of
the prioritization techniques, and then the groups’ average rankings
were compared.

How to prioritize financial goals and make better allocation decisions

Contrary to previous research, this experiment found the techniques
yielded similar results, with a correlation of 0.89 between the
average rankings. Simply asking clients to rank their goals in order
of importance does effectively uncover their preferences; however,
Maximum Difference Scaling offers a few additional insights.

While both techniques can show the average sequential order of the
goals, the ranking score produced by the Maximum Difference Scaling
data quantifies how much more important one goal is than another.

For instance, our results indicate that the ranking score of the
financial goal “To not be a financial burden to my family as I grow
older” was about twice that of “To stop working and do something I
love” (0.37 versus 0.18). This suggests that on average people value
the goal of avoiding being a financial burden to their family as they
age twice as much as they desire to stop working and pursue their
interests. The chart below provides the full list of rankings.

Since many investors have more than one goal and tend to consider
them all equally when asked, it can be difficult for advisors to know
which ones to focus on, especially given limited resources.

The Maximum Difference Scaling technique can help investors
understand their preferences to determine which goals deserve more
attention and which can be stretch goals. For advisors, these new
insights can help them decide how much to allocate to each goal given
its importance to the client.

Although the Maximum Difference Scaling ranking technique may be
harder for advisors to implement, this research shows a possible step
forward for goal prioritization in financial planning. In our full
research paper we discuss other ideas for making the most of goal
planning and provide a behaviorally designed worksheet that can help
advisors initiate a goal conversation with their clients.

Read our recent paper, “Mining for Goals,” which
includes a printable goal-identification worksheet based on this
research.

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